DEALBOOK; Morgan Penalty In Price-Fixing Gets Approval

By PETER LATTMAN

Published: August 8, 2012

Morgan Stanley over accusations of price fixing in the electricity market.Yet even as he signed off on the settlement, Judge William H. Pauley III of Federal District Court in Manhattan expressed "misgivings" about the deal, saying the dollar amount was too low.">

Over objections from consumer groups and New York officials, a federal judge on Tuesday approved a $4.8 million settlement between the Justice Department and Morgan Stanley over accusations of price fixing in the electricity market.Yet even as he signed off on the settlement, Judge William H. Pauley III of Federal District Court in Manhattan expressed "misgivings" about the deal, saying the dollar amount was too low.

"Given the government's stark allegations of manipulative conduct against Morgan Stanley, disgorgement of $4.8 million is a relatively mild sanction," Judge Pauley wrote. "There is a risk that a large financial services firm like Morgan Stanley could view such a modest penalty as merely the cost of doing business."

The judge said he agreed to the settlement out of deference to government's arm's-length negotiations with Morgan Stanley. In his ruling, Judge Pauley cited a recent decision by a federal appeals court that criticized another federal judge,Jed S. Rakoff. The appeals court suggested that Judge Rakoff might have overstepped his authority when he rejected a contentious settlement between the government and Citigroup.

The Morgan Stanley case was the first attempt by the Justice Department to penalize a bank accused of using derivatives to help clients violate federal antitrust laws. Morgan Stanley, the government said, aided the efforts of KeySpan Corporation, a major utility company in New York, to manipulate electricity prices.

In 2006, the bank entered into a complex swap agreement with KeySpan that gave the company a stake in the profits of its competitor, Astoria Generating Company Acquisitions. Morgan Stanley also represented Astoria in the transaction.

The government said that the deal allowed KeySpan to push up the price of electricity in New York, costing consumers about $300 million. Morgan Stanley made $21.6 million from serving as an intermediary in the deal.

Morgan Stanley settled the accusations with a $4.8 million payment to the federal government without admitting any wrongdoing. In 2010, KeySpan, which is owned by the British energy company National Grid, paid $12 million to resolve its role in the case, also without admitting any wrongdoing.

Late last year, after the government solicited public comments on the settlement, AARP, an association of middle-age and older Americans, filed a complaint that the deal was too lenient and Morgan Stanley should be forced to disgorge all of its revenue from the transaction.

AARP also objected to Morgan Stanley's not having to admit that it violated the law. In addition, the payment will go to the United States Treasury and not to utility customers, the group said.

A Morgan Stanley spokeswoman declined to comment. A Justice Department spokeswoman said in a statement that the ruling "should send a message to the financial services community that the antitrust division will vigorously pursue anyone who engages in anticompetitive conduct in the derivatives industry and that they will be held accountable for their actions."

Michael Gianaris, a New York state senator, said he was extremely disappointed with the judge's ruling.

"By allowing Morgan Stanley to reap more than $16 million in profit despite their misdeeds, it does even less to deter other banks from engaging in the exact same scheme in the future," he said.

This is a more complete version of the story than the one that appeared in print.

Morgan Stanley over accusations of price fixing in the electricity market.Yet even as he signed off on the settlement, Judge William H. Pauley III of Federal District Court in Manhattan expressed "misgivings" about the deal, saying the dollar amount was too low.">